Wednesday, March 16, 2011

Finding the Best Credit Card for You

What's the best card in the world? It’s a low APR card with 0% balance transfer until the end of time, travel rewards so generous that you earn a free flight once a month and the most cheerful customer service you've ever experienced. And, of course, it doesn't exist.

Credit cards are about tradeoffs. If you want a low APR, you won’t get many rewards; if you want to earn airline miles, you’ll pay a higher interest rate and probably see annual fees. And if you have bad credit, your choices are more limited than most. The bottom line is that the best card for you depends on, well, you.

Credit Revolvers
Do you maintain a balance month-to-month, using the revolving credit line instead of paying off your balance every month? If so, you should look for a card that has low interest rates and fees. The easy part is finding a card with no annual fee; those come fairly standard with low APR’s. The key is to search around for a low interest rate. Credit unions are not-for-profit financial institutions that almost always have lower rates, and are more accepting of bad credit. Oh, and forget about rewards. Any rewards card will come with a high interest rate and/or annual fee, and anything you earn will be erased by the interest you accrue.

0% balance transfer: Now that you know you’re looking for a low APR, the next question is whether you’re carrying a balance. If you are, or if you want to consolidate your debt at a lower rate, take a look at a 0% balance transfer card. These offer promotions where the balance you shifted doesn't accrue interest for the 6-24 month introductory period. The Discover More Card, for example, is currently offering no interest on balance transfers for a full 24 months.You should go with one of these balance transfer cards if – and only if – you know you can pay off your debt in the promotional period; afterwards, the interest rate shoots up. Keep in mind, too, that many of these cards come with a one-time fee of around 3% of your balance. Make sure to factor that in when you make your calculations.

Low purchase APR: If you’re not carrying a balance, or if you can’t pay off your balance in time but still think shifting your balance is worthwhile, go for a straight-up low purchase APR card. For example, IberiaBank offers cards with rates as low as 7.25%, compared to the national average of nearly 15%. Like a balance transfer card, some low APR cards also offer a 0% purchase rate introductory period, and you should similarly be cautious that you don’t get caught when the rate goes up.

The Convenience Crowd
Transactors use their credit cards only as a convenience, building up a credit score but never carrying a balance month-to-month. If you’re one of these, you don’t need to worry as much about interest rates, since you pay off your balance every month. Instead, look for a good rewards card.

One aspect that’s given more weight than it deserves is the annual fee. Don’t be opposed to paying on principle; if your stellar rewards make up for the fee, the card is a good option. Three things that you should consider:

Introductory bonus: While low APR cards offer intro periods with no interest;rewards credit cards offer signing bonuses of extra miles or points, a waived first annual fee, or a free night at a hotel. Many times, these up-front rewards make up for the annual fee. Be careful, however, to weigh the signing bonus against the overall rewards rate. If the great one-time bonus comes with lukewarm rewards rates and you plan to hold the card for a while, you should reconsider.

Base rewards rate: Most cards give something like a mile per dollar or 1% cash back, but a few standout cards pay 2% on all purchases. Read the fine print: some rewards rates only kick in after a certain amount is spent. For example, a card may give 0.5% rewards on the first $5,000 spent and 1.5% thereafter. If you spend $10,000, your effective rewards rate will be 1%. The Escape by Discover Card is a great option that pays 2% back in travel rewards on all purchases, regardless of how much money you spend, and it offers $250 worth of bonuses for signing up (1,000 points per month for 25 months). This bonus more than covers the $60 annual fee for a few years.

Category rewards: Many cards give extra rewards on certain categories, some specific to the card and some that are announced every quarter. You may earn additional rewards on groceries, restaurants, retail stores, travel, and more. Some cards offer as much as 5% back on a given category. Pick a card that matches your spending patterns: if you fly a lot on American Airlines, don’t get a Southwest Rapid Rewards card; don’t waste your time on a gas credit card if you always bike. And, as always, look at the details: some cards have spending caps, and many don’t give rewards at warehouse stores like Sam’s Club or Costco.

No matter what your spending habits or priorities are, there are a few guidelines everyone should follow. Know how long you plan to keep the card, and remember that jumping from card to card impacts your credit score. Research a card before choosing. Depending on your credit score, you may not qualify for the lowest APR advertised, and if your score has taken a temporary hit, hold out for just a bit. Be smart, be thorough, be realistic.

About the Author is a website dedicated to educating consumers about credit cards, as well as helping them to compare credit card offers.

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